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Paul Krugman on the USA deficit

Buddahcall
Posts: 3
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10/21/2014 1:07:38 AM
Posted: 2 years ago
I read the entire article, and a few things he doesn't mention. Number one, Monetizing the debt. By essentially printing the money to pay for programs which is still happening at an alarming rate, the Fed is taxing you and me by making the dollar worth less and less. He is very excited that the deficit is shrinking, but we are still going in the wrong direction until that gap is closed, We have had this ability to print money simply because we are still the world reserve currency, most of the rest of the world is looking to change that. If we lose that position we go the way of Yugoslavia.
MonetaryOffset
Posts: 559
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10/22/2014 6:50:14 AM
Posted: 2 years ago
At 10/21/2014 1:07:38 AM, Buddahcall wrote:
I read the entire article, and a few things he doesn't mention. Number one, Monetizing the debt. By essentially printing the money to pay for programs which is still happening at an alarming rate, the Fed is taxing you and me by making the dollar worth less and less.

That just isn't true. The dollar index has been climbing in recent months, in spite of an unprecedented expansion in the monetary base. Much of that is due to the fact that QE was not that inflationary at all -- low velocity, high cash holdings, really low M1 multiplier -- and, at least recent, the market expectation of rate hikes. There's actually been worries lately, in light of falling European bond yields due to deflationary fears, that the dollar will appreciate TOO much, so I hardly see this as an issue. Also, you should bear in mind that the purchasing power of nominal wages, not of the dollar, is what matters. The dollar can "fall," but if your wages purchase what they would otherwise, who cares?

http://www.reuters.com...
http://www.bloomberg.com...

He is very excited that the deficit is shrinking, but we are still going in the wrong direction until that gap is closed, We have had this ability to print money simply because we are still the world reserve currency, most of the rest of the world is looking to change that. If we lose that position we go the way of Yugoslavia.

Oh gosh, lol.

First, "printing money" and the deficit are actually separate issues. The Fed's OMO purchases -- and, mind you, they've shrunk to about $15 per month from $85 billion as of December 2013, and are projected to end during the Fed's next meeting (though whether they will, in light of Europe, is another question entirely) -- are on the secondary market. The Fed can't simply buy up Treasury bonds itself, so the notion that we can only run deficits because we have the capacity to print is wrong -- instead, we can never physically go bankrupt because of it, and that's the case for any country with debt nominally denominated in its own currency (so not Greece or Zimbabwe). Not to mention, the Treasury itself can issue money.

The point is, core inflation is at 1.46 percent as of September; that's down from 1.49 in August. Even core CPI, roughly 40 basis points below core PCE, is only at about 1.72. Headline is down and falling, and there are zero signs of acceleration. If you're concerned at all with flat, sluggish wage growth, as I am, you should support slightly higher medium-term inflation -- even higher than the 2 percent objective, in fact -- because inflationary expectations play a significant role in nominal-wage increases.
~JMK

9:43 P.M. EST, Nov 5, 2014: I became a basic white girl.
MonetaryOffset
Posts: 559
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10/22/2014 6:51:55 AM
Posted: 2 years ago
At 10/22/2014 6:50:14 AM, MonetaryOffset wrote:
At 10/21/2014 1:07:38 AM, Buddahcall wrote:
I read the entire article, and a few things he doesn't mention. Number one, Monetizing the debt. By essentially printing the money to pay for programs which is still happening at an alarming rate, the Fed is taxing you and me by making the dollar worth less and less.

That just isn't true. The dollar index has been climbing in recent months, in spite of an unprecedented expansion in the monetary base. Much of that is due to the fact that QE was not that inflationary at all -- low velocity, high cash holdings, really low M1 multiplier -- and, at least recent, the market expectation of rate hikes. There's actually been worries lately, in light of falling European bond yields due to deflationary fears, that the dollar will appreciate TOO much, so I hardly see this as an issue. Also, you should bear in mind that the purchasing power of nominal wages, not of the dollar, is what matters. The dollar can "fall," but if your wages purchase what they would otherwise, who cares?

http://www.reuters.com...
http://www.bloomberg.com...

He is very excited that the deficit is shrinking, but we are still going in the wrong direction until that gap is closed, We have had this ability to print money simply because we are still the world reserve currency, most of the rest of the world is looking to change that. If we lose that position we go the way of Yugoslavia.

Oh gosh, lol.

First, "printing money" and the deficit are actually separate issues. The Fed's OMO purchases -- and, mind you, they've shrunk to about $15 per month from $85 billion as of December 2013, and are projected to end during the Fed's next meeting (though whether they will, in light of Europe, is another question entirely) -- are on the secondary market. The Fed can't simply buy up Treasury bonds itself, so the notion that we can only run deficits because we have the capacity to print is wrong -- instead, we can never physically go bankrupt because of it, and that's the case for any country with debt nominally denominated in its own currency (so not Greece or Zimbabwe). Not to mention, the Treasury itself can issue money.

The point is, core inflation is at 1.46 percent as of September; that's down from 1.49 in August. Even core CPI, roughly 40 basis points below core PCE, is only at about 1.72. Headline is down and falling, and there are zero signs of acceleration. If you're concerned at all with flat, sluggish wage growth, as I am, you should support slightly higher medium-term inflation -- even higher than the 2 percent objective, in fact -- because inflationary expectations play a significant role in nominal-wage increases.

*40 basis points above core PCE
~JMK

9:43 P.M. EST, Nov 5, 2014: I became a basic white girl.
MonetaryOffset
Posts: 559
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10/22/2014 6:56:47 AM
Posted: 2 years ago
And, to comment on the Krugman piece, generally I think he's right; there's been a great deal of a paranoia over the deficit, and calls to cut it right now as though it's the chief or even among the top 5 most pressing problems we face, when that just isn't the case. Granted, Krugman's much more into fiscal stimulus than I am -- I'm a believer in monetary offset (per my username) even at zero nominal interests, so I have a hard time buying into stimulus as a means to an end, rather than an end in itself, though in theory it could work, provided that monetary policy is expansionary enough to prevent real rates from rising; but, even if that's the case, why bother with fiscal stimulus?
~JMK

9:43 P.M. EST, Nov 5, 2014: I became a basic white girl.
PotBelliedGeek
Posts: 4,298
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10/22/2014 7:57:00 AM
Posted: 2 years ago
At 10/22/2014 6:56:47 AM, MonetaryOffset wrote:
And, to comment on the Krugman piece, generally I think he's right; there's been a great deal of a paranoia over the deficit, and calls to cut it right now as though it's the chief or even among the top 5 most pressing problems we face, when that just isn't the case. Granted, Krugman's much more into fiscal stimulus than I am -- I'm a believer in monetary offset (per my username) even at zero nominal interests, so I have a hard time buying into stimulus as a means to an end, rather than an end in itself, though in theory it could work, provided that monetary policy is expansionary enough to prevent real rates from rising; but, even if that's the case, why bother with fiscal stimulus?

Can you explain what monetary offset it?
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MonetaryOffset
Posts: 559
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10/22/2014 8:00:37 AM
Posted: 2 years ago
At 10/22/2014 7:57:00 AM, PotBelliedGeek wrote:
At 10/22/2014 6:56:47 AM, MonetaryOffset wrote:
And, to comment on the Krugman piece, generally I think he's right; there's been a great deal of a paranoia over the deficit, and calls to cut it right now as though it's the chief or even among the top 5 most pressing problems we face, when that just isn't the case. Granted, Krugman's much more into fiscal stimulus than I am -- I'm a believer in monetary offset (per my username) even at zero nominal interests, so I have a hard time buying into stimulus as a means to an end, rather than an end in itself, though in theory it could work, provided that monetary policy is expansionary enough to prevent real rates from rising; but, even if that's the case, why bother with fiscal stimulus?

Can you explain what monetary offset it?

Sure. In theory, it's the notion that any fiscal stimulus which causes a rightward shift in AD will shift back to its initial position as the Fed "offsets" any unexpected change in inflation with contractionary monetary policy -- in other words, it's the Fed's economy, and we just live in it. It's a tad simplistic in much the same way as the Samuelson consumption-loan model, so I think the best way to interpret it is that, if Congress passes a stimulus, the Fed will be less aggressive than it otherwise should have been. And that's a problem for a few reasons, but mainly because monetary policy is costless, whereas fiscal stimulus isn't. Granted, if you buy into stagnation -- as I do - -it *may* be the better option, structural reform permitted.

A really good paper on offset, if you're interested: http://mercatus.org...
~JMK

9:43 P.M. EST, Nov 5, 2014: I became a basic white girl.